Cost basis of stock gifts using the lifetime exclusion

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tecmage
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Cost basis of stock gifts using the lifetime exclusion

Post by tecmage » Fri May 23, 2014 9:51 am

Hopefully someone can answer this for me as I've been getting conflicting answers.

Person A gives Person B a gift of 10,000 shares of stock with a cost basis of $5, the stock is now worth $50 on the day it's given. As I understand it the IRS will calculate the gift to be worth $50*10000 or $500,000 which will then be applied to the estate/gift tax exclusion but the cost basis stays $5, making it more beneficial to wait until the Person A passes and lets the estate step up the cost basis.

A CPA was consulted and said the government can't have it both ways, if you give a gift under the lifetime gift/estate tax exemption then the cost basis is stepped up to $50 share instead of keeping the $5 cost basis.

So my question to the experts, what is the real cost basis of the stock in this hypothetical example?

Thanks,
Tec

sscritic
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Re: Cost basis of stock gifts using the lifetime exclusion

Post by sscritic » Fri May 23, 2014 9:57 am

Get a new CPA.

Hint: the rules for gifts are not the same as the rules for dying.
Last edited by sscritic on Fri May 23, 2014 9:58 am, edited 1 time in total.

tecmage
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Re: Cost basis of stock gifts using the lifetime exclusion

Post by tecmage » Fri May 23, 2014 9:57 am

sscritic wrote:Get a new CPA.
Kinda what I figured. Thanks for the confirmation.
sscritic wrote:Hint: the rules for gifts are not the same as the rules for dying.
Agreed, everything I read said the same thing. They insisted that they were stepping up cost basis for a piece of land that was a gift for another client and stocks fell under the same rules. The gift was already given, so I'm just advising person B that they will owe capital gains based on $5/share instead of $50.

Do things change if Person A doesn't use the exclusion and pays the gift tax?

Iorek
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Re: Cost basis of stock gifts using the lifetime exclusion

Post by Iorek » Fri May 23, 2014 10:54 am

Wouldn't person A rather pay LTCG tax than gift tax, and gift the proceeds?

Retread
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Re: Cost basis of stock gifts using the lifetime exclusion

Post by Retread » Fri May 23, 2014 11:18 am

It's obvious not all CPA's are tax experts. Many CPA's deal so much in charitable transactions that they forget the basic basis rules on transactions between individuals. Ignore the advice. The basis remains unchanged and carries over to the donee.
Bruce
absit iniuria verbis

Retread
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Re: Cost basis of stock gifts using the lifetime exclusion

Post by Retread » Fri May 23, 2014 11:20 am

Iorek wrote:Wouldn't person A rather pay LTCG tax than gift tax, and gift the proceeds?
By giving the stock he pays neither gift nor capital gains tax. Perhaps the donee is in a lower tax bracket or has no plans to sell the asset.
Bruce
absit iniuria verbis

Iorek
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Re: Cost basis of stock gifts using the lifetime exclusion

Post by Iorek » Fri May 23, 2014 11:22 am

Retread wrote:
Iorek wrote:Wouldn't person A rather pay LTCG tax than gift tax, and gift the proceeds?
By giving the stock he pays neither gift nor capital gains tax. Perhaps the donee is in a lower tax bracket or has no plans to sell the asset.
Bruce

Sorry-- that comment was directed at the question of whether the basis would adjust if the donor paid the gift tax. Are there tax brackets where the donor would be better off paying gift tax than LTCG?

kaneohe
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Re: Cost basis of stock gifts using the lifetime exclusion

Post by kaneohe » Fri May 23, 2014 11:23 am

Iorek wrote:Wouldn't person A rather pay LTCG tax than gift tax, and gift the proceeds?
Perhaps they would pay up to 23.8% on that but maybe B is in a lower bracket? Or maybe, as previously suggested, B might prefer to inherit it.

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jimb_fromATL
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Re: Cost basis of stock gifts using the lifetime exclusion

Post by jimb_fromATL » Fri May 23, 2014 11:38 am

As I understand it, the govenment does have it both ways. The donor's basis for gift tax or unified credit purposes is the market value at the time of the gift. But the cost basis for capital gains tax purposes for the recipient is the donor's original cost basis, not the value at the time of the gift.

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jimb

sscritic
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Re: Cost basis of stock gifts using the lifetime exclusion

Post by sscritic » Fri May 23, 2014 12:32 pm

jimb_fromATL wrote:But the cost basis for capital gains tax purposes for the recipient is the donor's original cost basis, not the value at the time of the gift.
It depends on up or down, gain or loss. In fact, you can have two different bases at the same time.

tecmage
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Re: Cost basis of stock gifts using the lifetime exclusion

Post by tecmage » Fri May 30, 2014 1:15 pm

Thank you everyone who replied, I just want to follow up really quick.

I just got a text message saying the CPA admitted they were wrong and the cost basis does not get stepped up in this case.

I propose a new slogan:
"Bogleheads, more accurate information than most paid professionals."

Retread
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Re: Cost basis of stock gifts using the lifetime exclusion

Post by Retread » Fri May 30, 2014 1:47 pm

tecmage wrote:Thank you everyone who replied, I just want to follow up really quick.

I just got a text message saying the CPA admitted they were wrong and the cost basis does not get stepped up in this case.

I propose a new slogan:
"Bogleheads, more accurate information than most paid professionals."
I'm still shocked that you were even given this opinion in the first place by someone licensed as a CPA.
Bruce (also a CPA as well as an attorney)
absit iniuria verbis

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